Bulls Still In Control…

BULLS STILL IN CONTROL FOR NOW: Markets Lurch

Through Another Busy Week

It’s that time again. Stock investors are yearning for earnings, and they’re getting a mixed bag of data for the pundits to feast upon. The majority of mega-cap companies are “beating” earnings, which begs the question of whether these corporations are actually thriving, or maybe the bar has just been set too low.

This is what it looks like when the market will find any excuse to push stocks higher: the green days are huge, and the red days are barely down. It’s not difficult to figure out what’s going on, though.

Even though Federal Reserve Chairman Jerome Powell clearly indicated his willingness to implement more interest rate hikes this year, investors don’t believe a word he says. It’s hard to blame them for distrusting Powell, who once said with a straight face that inflation would be “transitory.”

Powell also predicted a “mild recession” but backed off of that forecast recently. The soft-landing narrative is in full effect now, and it’s conveniently as another election year approaches.

Along with that, the market is increasingly forward-looking now, to the point where it’s buying mega-cap stocks in expectation of a recovery even if there is a recession. It’s a relief rally before there’s any reason to be relieved, but that’s market logic in the 2020s.

It’s hard to argue with the bulls when they’ve been winning for most of the year. July marked five consecutive positive months for the S&P 500, which can either be viewed as bullish momentum or extremely overbought conditions.

Not only that, but stocks are looking frothy going into a seasonally challenging time of the year. The old maxim “sell in May and go away” hasn’t panned out yet, but don’t dismiss the possibility of a delayed onset of seasonal weakness in large-cap stocks.

In other words, there could be some speed bumps coming in August and September. Seasonal trends don’t always play out in the financial markets, but if history is a reliable guide, this probably isn’t a bad time to consider taking some profits.

Although there are no guarantees, this is what the next two months might look like. The effect could be further exaggerated since the seasonal weakness of May didn’t play out and the bears have been hibernating for quite a while now.

Different folks will look at the same set of circumstances and come to different conclusions, though. Mainstream commentators speak of the “tight” jobs market as if high-paying positions are available for the taking.

The middle class isn’t seeing what the commentators are claiming. The U.S. Bureau for Labor Statistics revealed that job openings in June slipped to their lowest number since April 2021 as employers reduced hiring. The number of available positions fell to 9.6 million while hiring fell to its lowest level in over two years. Moreover, layoffs were barely changed at 1.5 million for the month, so there’s little relief for U.S. workers.

Even while the stock market sees no problem with the economic data at hand, the bond market has an entirely different interpretation of events. The spread between the 2-year and 10-year Treasury yield just hit a high of -86, the highest level since July 13. Such a deeply inverted yield curve is the bond market’s way of forecasting a recession followed by the Federal Reserve cutting interest rates.

On top of that, and despite the comforting words of recession deniers like Janet Yellen, the U.S. manufacturing sector is practically screaming “recession.” The ISM manufacturing PMI for July came in at 46.4, below economists’ estimate of 46.9. That’s not the most shocking part of the story, though. Alarmingly, June’s result marks the ninth straight month that the PMI has been in a state of contraction (a number above 50 shows expansion in the manufacturing index while a reading below 50 indicates contraction).

So, how could stocks continue to climb a “wall of worry” even while the employment data, bond market, and manufacturing sector are flashing clear warning signals? It’s only possible because many S&P 500 businesses aren’t actually doing that well, and the market is obsessively focused on a handful of “magnificent” tech stocks and A.I. darlings.

An imbalanced market allows dislocations like this, but it can only last for so long. It’s going to become increasingly difficult to ignore the flagging fundamentals of a struggling business sector when lending standards are tighter than they’ve been in over a decade.

According to one report, it hasn’t been this hard to get a loan since the financial crisis of 2008. In fact, a new survey of senior loan officers found that 51% of U.S. banks have imposed stricter lending standards on large- and medium-sized businesses. That’s up from 46% in this year’s first quarter.

Those are the facts, but facts don’t always matter to the market makers in the short term. If seasonality and earnings data don’t bring stocks back to their intrinsic value, something else will sooner or later, though probably not when the self-appointed experts expect it to happen.